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The Norselab Approach to Nordic High Yield

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Stockholm (HedgeNordic) – While most investors in high-yield bonds focus on avoiding defaults, there is one team in the Nordics that doesn’t shy away from investing in distressed investments and going through restructurings. Tom Hestnes, who has been involved in over 50 restructurings in the Nordics since 2015, joined Norselab in 2022 to launch a series of alternative investment funds that partially invest in special distressed opportunities.

Joined by co-portfolio manager Ole Einar Stokstad, formerly Head of Credit Research at DNB Markets, Tom Hestnes has been managing Norselab Meaningful Impact High Yield since December 2022. A year later, amid promising opportunities in the Nordic real estate market, Norselab launched a second high-yield fund structured as an alternative investment fund to invest in Nordic real estate. With both Hestnes and Stokstad joining Norselab in mid-2022, the team opted for the alternative investment fund structure to overcome structural limitations in the Nordic high-yield market, such as limited liquidity.

AIF Advantages

“Managing less liquid investments in a liquid structure like UCITS has proven quite a challenge sometimes,” explains Hestnes. “The AIF structure allows for better fund management by offering investors monthly liquidity instead of daily.” Additionally, the AIF structure permits the use of leverage, with Meaningful Impact High Yield benefiting from a 15 percent credit facility that serves as a liquidity buffer. This structure also facilitates currency risk hedging in the portfolio, particularly important for a pan-Nordic portfolio. “We use that credit facility for margin calls, so external factors like currency fluctuations do not affect the portfolio.”

“The AIF structure permits more concentration, allowing us to maintain a fundamental approach to investments.”

Equally important, the AIF structure allows the two-person team to maintain more concentration and focus on a smaller number of issues in the portfolio. “Asset growth becomes your enemy at a certain stage in the Nordic high-yield market,” notes Hestnes. Under UCITS regulations, the maximum investment in a single issuer can reach ten percent of the portfolio. “Once you reach four to five billion Norwegian kroner, you are forced to invest in more companies,” he elaborates. For a two-person team, size becomes an issue at that point. “The AIF structure permits more concentration, allowing us to maintain a fundamental approach to investments.”

100% Alpha Focused

Norselab Meaningful Impact High Yield adopts a benchmark-agnostic strategy, targeting the highest risk-reward opportunities in the credit segment around B and BB+. “We are 100 percent alpha-focused,” says Hestnes. “We do not benchmark against anyone or anything, and try to deliver the best absolute return in the high-yield space.” However, Hestnes and his co-portfolio manager, Ole Einar Stokstad, do not solely seek the best risk-reward opportunities in the market. “With almost all our investments, we like to have expectations of positive triggers or catalysts,” emphasizes Hestnes. “In a flat market with a portfolio yielding 12.5 percent, we seek an outcome closer to 15 percent” due to catalysts driving additional returns.

“We do not benchmark against anyone or anything, and try to deliver the best absolute return in the high-yield space.”

While the Nordic high-yield market returned 10.5 percent in 2023, Norselab Meaningful Impact High Yield returned 15.7 percent, reflecting the active selection of credits with positive catalysts. “We spice up the returns with distressed and catalyst-driven investments,” explains Hestnes. Active investing in the Nordic high-yield market serves as a tool for generating above-market returns. “We refrain from using the term ‘trading’ because we don’t trade. However, we aim to be active and benefit from large relative value spreads within sectors and risk categories,” he adds. “The beauty of illiquid markets lies not only in their challenges but also the opportunities they present, which we try to exploit by turning the portfolio.”

“The beauty of illiquid markets lies not only in their challenges but also the opportunities they present, which we try to exploit by turning the portfolio.”

The team decided to overweight the “investment companies” sector in 2023, as it was heavily impacted in late 2022 due to the rise in interest rates. “This sector rebounded very strongly in 2023,” notes Hestnes. Underweighting or nearly avoiding investments in real estate in the first half of 2023 also proved to be beneficial for Meaningful Impact High Yield. “We started overweighting the sector in August, September.” Amid promising opportunities in the Nordic real estate market, Norselab soon launched a second high-yield fund to invest in Nordic real estate.

Real Estate-Focused Launch

“The backdrop to this story is the rapid growth of the real estate sector in the high-yield market,” explains Hestnes. With real estate accounting for about one-fourth of the Nordic high-yield market, Hestnes believes this sector’s expansion posed a systematic risk to the high-yield market. underwent significant changes in 2022 due to rising interest rates and worsening financing conditions. These challenges persisted in 2023 as higher financing costs continued to impact companies’ financials.

“We excel in volatile and challenging markets, so we had been planning a dedicated fund for this market when the timing was right.”

“When we launched the first fund, we indicated that the second potential fund would likely focus on real estate once market opportunities became attractive,” recalls Hestnes. “We excel in volatile and challenging markets, so we had been planning a dedicated fund for this market when the timing was right,” he continues. “We anticipated that conditions would worsen before improving. By the summer of last year, we observed signs that this scenario would likely play out by the end of 2023.”

In early November, Hestnes and his team announced a collaboration combining their credit expertise with the sector-specific knowledge of real estate players K2A and Compactor to launch a real estate-focused high-yield fund. “Although we are credit specialists, we are still sector generalists and always aimed to establish industrial competence within the fund,” Hestnes explains the collaboration. With Norselab Real Estate Credit Opportunities maintaining a much more concentrated portfolio of between ten to 15 investments, “the due diligence and the underlying assessment should be more extensive than in our first fund.” The rapid expansion of the real estate sector within the Nordic high-yield market has presented both challenges and opportunities. And now Norselab has the vehicle to capture any emerging opportunities.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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